Particularly in the last decade, the expansion of Internet access has enabled the democratization of many spaces and of course, led to the emergence of new forms of economies. Today, there are thousands of ways to make money on the Internet, from simple short-term work to virtual capital investments.
Access to the internet has also enabled numerous forms of wealth creation, for example investing in cryptocurrencies, which is the best example of this.
The cryptocurrency market has seen rapid growth and is coveted by various industries around the world. The innovation of its operation has made its use easily accessible and understandable. As a result, cryptocurrencies have seen a worldwide spread that has allowed them to be validated as a valid investment method.
One of the most innovative ways for artists to make money on the internet is through the creation and publication of NFTs, which stands for non-fungible token. This is a digital security whose price is determined by the market and whose ownership can be traced through the blockchain .
However, an NFT can be very expensive, which can of course be seen as an important advantage. However, it is increasingly seen as a disadvantage. After all, an expensive NFT is difficult to sell. There are few buyers, and the buyers are not sure how much the NFT should be worth.
There seems to be a solution to this problem: fractionalized NFTs. This is a form of NFT where the NFT is divided into several smaller tokens. In this article we explain everything about NFTs and fractionalized NFTs.
- 1 What is an NFT?
- 2 The main features of an NFT
- 3 How do non-fungible tokens work?
- 4 Where can you buy an NFT?
- 5 What is NFT art and what makes it so special?
- 6 Play-to-Earn Games with NFTs
- 7 What is a disadvantage of an NFT?
- 8 What are fractionalized NFTs?
- 9 The benefits of fractionalized NFTs
- 10 Conclusion
What is an NFT?
NFT stands for non-fungible token, and is a digital asset based on the Ethereum blockchain system that is basically assigned a market value based on its attractiveness. This market consists of a digital version of collectibles, which are very different from the traditional market because they are intangible goods.
Non-fungible tokens are digital goods, for example NFT art in the form of images, animated images, videos, audio files, texts or other forms of representation, which are offered for sale via the blockchain, so that their complete transaction history and thus their authenticity can be are traced.
The main features of an NFT
Let’s take a look at the key features of an NFT so you know exactly what an NFT is.
Unlike the traditional collector market, where the verification process can be considered subjective, in the case of NFTs, the verification of authenticity and ownership is completely objective. It can be verified against the transaction history provided by the blockchain, which shows the transactions involving that item and its sole owner.
Ownership by the users
The value of an NFT is based on the concept of its uniqueness and the inability to duplicate it. So when you buy an NFT, you have absolute ownership of the token and not a license to use or consume it.
Since NFTs are based on the blockchain, they are stored in the form of smart contracts that are publicly accessible and cannot be edited, modified or modified, so that even their original content cannot be erased, destroyed or replicated.
Because NFTs are indestructible, verifiable and absolutely functional, they are unique, meaning that a valid copy of an item of the same value cannot be made since there is only one original.
It was first thought that unlike cryptocurrencies, and despite using the same technology as cryptocurrencies, NFTs cannot be split. They were thought to be priced based on their totality. If you own a cryptocurrency, you can sell and trade part of it, which seemed impossible with an NFT.
The situation is somewhat different with fractionalized NFTs. It has recently become possible to divide NFTs into smaller NFTs. Later in this article, we’ll tell you exactly how that works.
How do non-fungible tokens work?
Non-fungible tokens are based on the same principle as the traditional collectibles market, with the important difference that the items are intangible. Here, blockchain technology is used to secure and verify transactions in a transparent manner. This allows the ownership of an item to be determined in a unique way.
As mentioned, such content each has a value determined by the market. It could be images, videos, lyrics, songs, or anything else that is unique and not repeatable. Unlike cryptocurrencies, which have an identical value from token to token, NFTs are unique and therefore not exchangeable.
The market determines the value of a product through the principle of scarcity, which means that the lower the supply and the higher the demand, the higher the price. Consequently, as long as the creator of the product determines that his work is a unique and non-repeatable product and thus offers it on the market, its value will increase as interest in it increases.
The online collectibles market, as the NFT market is called, is based on the exclusivity of ownership it offers to buyers. They become the sole owners of the product they buy, even if the creation can be duplicated or distributed online, as ownership in the blockchain system is in the name of the owner, who is the only one who can prove the authenticity of the product .
NFTs are digital assets traded over the blockchain, which allows any internet user to verify the origin and sequence of transactions related to a particular asset. This has given these types of transactions with cryptocurrencies a high degree of security and reliability since their inception, and now that they have become popular, they are used as a means of verifying the origin and sequence of transactions.
Where can you buy an NFT?
To buy NFTs, you usually first have to buy coins from the cryptocurrency on which the system is based, which is Ethereum. That’s why you need an exchange that allows you to trade this cryptocurrency, as well as a wallet where you can store coins or tokens and NFTs. Investing in crypto also means using resources to acquire assets, relying on luck or adversity to achieve positive results.
Cryptocurrencies are characterized by being particularly volatile considering the variables that affect them as they lack traditional fundamentals compared to traditional currencies. The vulnerability of cryptocurrencies is also magnified by the uncertainty of the novelty of its implementation. Therefore, this type of transaction carries a higher risk.
Given the massive growth since 2018, there are now plenty of digital platforms to access the NFT market. One of the arguably the best providers to buy NFTs is OpenSea. In addition to accessing unique tokens, this site allows users to use certain automated tools that cannot be found on other servers.
There are also other platforms where you could buy NFTs. For example, think of SuperRare, Rarible and Binance . We previously wrote an article about the best platforms to use to buy NFTs. You can read this article here [LINK TO ARTICLE].
What is NFT art and what makes it so special?
Art has always been a subjective subject and its value has therefore always been determined by its attractiveness in the market. In the case of NFTs, the same is true, but we are not talking about oil paintings, sculptures or crafts that can be touched or found in a museum, but objects that exist digitally.
These items have the value that the market assigns to them because they are unique and unrepeatable and because their indivisible property is what is offered by their sale. The buyer is the only verifiable owner of the specific NFT type, and this can be verified through blockchain transactions.
On the other hand, while digital files are more easily copied, distributed and forged than traditional tangible works of art, the originality and ownership of a work can be demonstrated very easily, adding value to the work and increasing confidence in the NFT market as a valid market for art transactions.
Play-to-Earn Games with NFTs
Play-to-Earn games, or P2E games for short, are characterized by an ecosystem powered by cryptocurrencies that have value beyond the game itself. They also provide real economic benefits to players. This type of gaming uses NFTs.
There are many different types of these P2E games. These can be simple missions, but also complex adventures. In any case, the rewards can take the form of NFTs that can be traded on the market or in the form of game currencies that can be used to buy other cryptocurrencies on exchanges.
The operation of these games always depends on the market prices, which can fluctuate and benefit or strongly influence the profit of the user. It is therefore necessary to analyze the game conditions before making a large investment, in order to avoid surprises that could affect the user’s finances.
P2E games have a very wide audience, which has grown steadily over time as its use has become more popular. That is why they can now also be found on major online gaming platforms such as Steam. These services have recognized the potential of such games and the winning opportunities they provide to their users and have therefore included them in their offerings, reaffirming confidence in the NFT market and making it more known worldwide.
What is a disadvantage of an NFT?
Now that you know what an NFT is and what it can be used for, it’s important to look at the other side as well. NFTs also have several disadvantages that we can think of.
Earlier in this article we already discussed the divisibility of an NFT. Traditionally, an NFT would not be divisible. This is because an NFT is unique. This is not the case with a normal cryptocurrency, which means that a normal crypto coin is divisible. As you may well know, Bitcoin is divisible to many decimal places. This offers many possibilities. When Bitcoin is worth a lot, it can still be used as a means of payment, because Bitcoin can be divided into small pieces.
NFTs can of course become worth a lot. For example, NFTs with a value of tens of millions of euros have been sold. Chances are you are not able to buy such an NFT at this time. After all, this amount is so large that people do not even own it. Never mind that they have the option to spend it on an NFT.
It is an advantage for creators of NFTs that the value can be so high. However, this is a disadvantage for users and owners of NFTs. They simply cannot buy some NFTs because they are too expensive. It is also impossible for owners of expensive NFTs to resell an NFT. After all, there are few people who can put down a lot of money for an NFT of tens of millions of euros.
This would be a lot easier if an NFT can be broken down into several small NFTs. They can therefore be sold for smaller amounts, and together they form an entire NFT. This brings with it many more possibilities, which you might not think of at first.
What are fractionalized NFTs?
What we were just talking about is fractionalized NFTs. This ensures that an NFT can be divided into several pieces. When that happens, the NFT will first be stored in a smart contract . Next, the smart contract ensures that the NFT, which uses the ERC721 token protocol, is split into pieces of tokens that use the ERC20 protocol. Each piece of token represents a portion of the entire NFT.
The owners of the ERC20 token officially own part of the entire NFT. The number of tokens a person owns determines what percentage he owns in the NFT. Suppose an NFT is broken up into 10 small chunks of tokens. This would mean that each piece represents 10%. When a user owns 3 tokens, he owns 30% of the entire NFT.
These pieces of tokens are used for sale. Someone determines in advance how many tokens there will be. Only the owner of the entire NFT can do this. Then these pieces go on sale, until all pieces are sold out. The creator of the tokens can also determine what the price is, and under what conditions the tokens are sold. For example, use can be made of a certain period of time in which the tokens are available. Or you can choose to continue with the sale until all tokens are sold out.
There are several advantages to consider for fractionalized NFTs. The main advantage is that people with little money can now invest in expensive NFTs. So you can think of it as tokenizing NFTs, as crazy as that may sound.
For example, if an NFT proposes De Nachtwacht on the blockchain. The estimated value of this work of art is 500 million euros. You can imagine that there are only a few people who can invest this amount in De Nachtwacht. Therefore, it could be chosen to divide the NFT into 1000 ERC20 tokens, each representing 0.1% of holdings.
A token then costs 50,000 euros, which is of course still a lot of money. Nevertheless, the target group for the sale of the tokens is currently a lot larger than when the complete NFT is put up for sale for 500 million euros. Even investors with a ‘small wallet’ now have the opportunity to buy part of De Nachtwacht.
Should the NFT of this painting be sold for 1 billion euros in a few years’ time, the owners of the ERC20 tokens will also benefit from this sale. They will then receive 0.1% of the sales amount, which in this case is 100,000 euros.
The benefits of fractionalized NFTs
A fractionalized NFT can therefore have the advantage that it is easier to sell the NFT, because it can be divided. As a result, the prices of the shared NFTs are lower, which means that the target group is considerably larger. In general, you can expect the following benefits:
- Better pricing;
- Better liquidity;
- Democratization of an investment.
When an NFT is expensive, there are few potential buyers in the market. This makes it difficult to get a good price. There must be a good balance between supply and demand. But other things will also have to be looked at in order to determine the price. Think, for example, of historical prices, and the money that others are willing to put down.
An expensive NFT has not yet had many buyers. This makes it difficult to determine the price of an NFT when it is sold on. At least, that is difficult for the buyer. However, if other people have already bought an NFT for 10 euros, then you know that the price for you should not be much higher than this price.
It also ensures that you can look at what other people pay for something. When many people pay 10 euros for an NFT, you know that the NFT is popular and you also want to pay this amount for it.
None of this is possible when an NFT is extremely expensive. In that case, you cannot ‘cheat’ what other investors are doing. Once this NFT is broken down into small chunks, potential buyers can set a much better price, which also makes them more interested in buying an NFT. After all, people are herd animals, who like to watch how others are doing.
Liquidity means that there are enough assets to sell and buy. A good balance between supply and demand is important for this. Suppose there are a lot of buyers, while there are virtually no suppliers, then a product is anything but liquid. There is then no good relationship between supply and demand, which means that people could manipulate the price. This could leave a buyer paying too much money for a product.
Many cryptocurrencies have problems with liquidity. They then have difficulty in being sold. This is especially the case with small cryptocurrencies, which are not yet known. There are then few buyers, so the price will always remain very low. Or there are few to no exchanges that want to include the coin on the platform. As a result, they will also not do good business with the sale of their currency.
By dividing a large NFT into smaller pieces, multiple pieces can be sold. This means that there is better liquidity. After all, people can more easily buy an ERC20 token that is linked to the entire NFT. This provides advantages for the selling party, because they can sell their tokens more easily. Buyers also benefit from this, because they will pay a fair price for the tokens. They are less likely to feel cheated after purchasing the tokens, as is often the case with a token that is not liquid.
Democratization of the investment
By dividing the NFT, there are multiple owners of the NFT. This ensures a better democratization of the NFT. There are several people who have a say in what happens with an NFT. Suppose someone wants to sell the entire NFT, then it will first have to be voted on. After all, there is not one owner who can decide everything for himself. Instead, there are multiple owners, all of whom have to agree. Subsequently, a democracy is created behind the NFT; people are going to vote on what the future of the NFT will look like.
This, of course, contributes to the decentralized nature of the blockchain, as it was once intended by Satoshi Nakamoto . There is no longer one central party in charge. Instead, there is a decentralized network of people who determine what will happen.
NFTs have become extremely popular. This is reflected in the enormous increase in the demand for NFTs. The prices of an NFT are skyrocketing as a result. People sometimes have millions of euros for an NFT. In fact, NFTs have already been sold for tens of millions of euros.
Of course, most people don’t have the money to buy such expensive NFTs. There is a solution for them: fractionalized NFTs. An NFT can be divided into several ERC20 tokens by means of a smart contract. Each token represents a portion of the NFT. This means that when there are 10 tokens, each token represents 10%. An owner then has a 10% say, but will also receive 10% of the price if the entire NFT is ever sold.
The fractionalized NFT has several advantages that are important to know. Of these, three advantages are the most important. Those are:
- Better pricing;
- Better liquidity;
- Democratization of an investment.
Now that you know what a fractionalized NFT is, you may have been persuaded to see if purchasing a fractionalized NFT is right for you. We wish you the best of luck in researching such NFTs and tokens, as well as buying them of course.
Thanh Lanh Tran(1989) is Chief Editor from BitcoinUSD.com